Foreclosures go upmarket
The market can also expect heavy losses among Option adjustable-rate mortgages (ARMs), a product that allowed negative amortization by letting borrowers choose to pay only the minimum monthly payment. Fitch Ratings expects significant payment shocks over the next several years as a wave of Option-ARMs recast from the minimum amount to a fully amortizing principle and interest payment. These recasts are expected to drive substantial losses among the Option-ARM sector.
"Several of our investors have questioned the current loss severity in light of negative amortization and home price decline," researchers wrote in the report. "Our analysis suggests that option ARM loss severity will likely range between 60% and 70% provided home prices have stabilized."